Five key principles of value investing

#1: Price is not value

• The worth of a business is independent of the market price.
• Day-to-Day stock quote - how much the few shareholders who bother to trade that day deicdie their investment is worth; It is categorically not the worth of the entire company.
• "Price is what you pay, value is what you get" - Benjamin Graham
• Big Swings in the market <>. big swings in the value.

#2: Mr. Market is a crazy guy

• He’s a very accommodating man who tells you every day what he thinks your shares are worth while simultaneously offering to buy you out or sell you more shares on that basis. 
• Sometimes you may be happy sell out to him when he quotes you a crazily high price or happy to buy from him when his price is foolishly low. 
• The rest of the time, you will be wiser to form your own ideas about the value of your holdings, based on updates from the company about its operations and financial position.

#3: Every stock has an intrinsic value 

• The true value of a business is known as its ‘intrinsic’ value and is difficult, though not impossible, to ascertain.
• ‘Relative’ value - compare a valuation ratio for the company (P/E, P/B, P/S, etc...) with its industry peer group or the market as a whole. - Something that appears to be relatively cheap on that basic can still be overvalued in an absolute sense.
• 'Intrinsic' value - measure a company on its economics, assets and earnings independently of other factors. To establish intrinsic value, is no a straightforward work & there are multiple, contradictory ways of calculating it.

#4: Only buy with a margin of safety

• The difference between the market price and the intrinsic value is the margin of safety.
• A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world. - Seth Klarman
• Opinions are divided on how large the discount needs to be to qualify the stock as a potential ‘buy’.
• Graham suggested looking for a margin of safety in some circumstances of up to 50% but more typically he would look for 33%.

#5: Diversification is the only free lunch

• You shouldn’t put all your eggs in one basket – but in practice, it seems to be extremely difficult to pull off. 
• Two Camps
• Warren Buffett's ‘focus portfolio’ camp - you should put all your eggs in just a few baskets and watch them like a hawk.
• More ‘quantitative’ value farmers - to ‘harvest’ the value premium from the market.
• Graham recommended owning a portfolio of 30 bargain stocks to minimize the impact of single stocks falling into bankruptcy or distress
• Joel Greenblatt recommends a similar level of diversification when following his MagicFormula strategy.

References:-

• The Key Principles of Value Investing, stockopedia.com